U.S. patent number 7,979,334 [Application Number 10/657,535] was granted by the patent office on 2011-07-12 for system and method for determining the buying power of an investment portfolio.
This patent grant is currently assigned to Blackrock, Inc.. Invention is credited to Joseph Kochansky.
United States Patent |
7,979,334 |
Kochansky |
July 12, 2011 |
System and method for determining the buying power of an investment
portfolio
Abstract
A system and method for determining the buying power of an
investment portfolio are disclosed which involve providing a set of
compliance rules for an investment portfolio, receiving a request
to analyze a proposed transaction, and calculating a transaction
limit for the proposed transaction based upon the set of compliance
rules.
Inventors: |
Kochansky; Joseph (Bronxville,
NY) |
Assignee: |
Blackrock, Inc. (New York,
NY)
|
Family
ID: |
34226582 |
Appl.
No.: |
10/657,535 |
Filed: |
September 8, 2003 |
Prior Publication Data
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|
|
Document
Identifier |
Publication Date |
|
US 20050055300 A1 |
Mar 10, 2005 |
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Current U.S.
Class: |
705/36R |
Current CPC
Class: |
G06Q
40/06 (20130101) |
Current International
Class: |
G06Q
40/00 (20060101) |
Field of
Search: |
;705/36R |
References Cited
[Referenced By]
U.S. Patent Documents
Other References
(Friedman, Jack, Dictionary of Business Terms, 2000, Barron's
Educational Series, Third Ed., p. 42). cited by examiner .
Jack P. Friedman, "Dictionary of Business Terms," 2000, 3rd
Edition, p. 42. cited by examiner.
|
Primary Examiner: Patel; Jagdish N
Assistant Examiner: Bartley; Kenneth
Attorney, Agent or Firm: Edwards Angell Palmer & Dodge
LLP
Claims
What is claimed is:
1. A computer implemented method of determining a buying power of
an investment portfolio for a given security, the method comprising
the steps of: a) storing a set of compliance rules in a database,
each of the compliance rules defining a limit on an amount of
shares of the security that can be added to the investment
portfolio based on predetermined criteria; b) calculating a
transaction limit for a proposed transaction involving the security
for each compliance rule in the set of compliance rules; c) sorting
the set of compliance rules from most restrictive to least
restrictive based on the calculated transaction limit for each
compliance rule, wherein the most restrictive compliance rule has a
lowest transaction limit and the least restrictive compliance rule
has a highest transaction limit, and wherein the steps of
calculating the transaction limit and sorting the set of compliance
rules are performed by an analytical server; d) displaying a buying
power message box on an output device, wherein the buying power
message box displays the sorted set of compliance rules and the
calculated transaction limit for each rule; and e) displaying a
rule description box on the output device with the buying power
message box, wherein the rule description box defines how the
transaction limit was calculated.
2. The method according to claim 1, further comprising using the
analytical server to test each compliance rule against the proposed
transaction using a nominal transaction value.
3. A method according to claim 2, further comprising the step of
using the analytical server to determine that the buying power of
the portfolio for the proposed transaction is zero if the nominal
transaction value for the proposed transaction violates a
compliance rule.
4. The method of claim 1, wherein the predetermined criteria
include at least one of duration guidelines, asset allocation
guidelines, credit ratings, and restricted security lists.
5. A computer implemented method of determining a buying power of
an investment portfolio comprising the steps of: a) receiving a
request to analyze a proposed transaction involving a security from
a portfolio manager for a selected portfolio stored in a portfolio
database; b) retrieving the selected portfolio from the portfolio
database; c) accessing a set of compliance rules related to the
selected portfolio from a rules database; d) determining whether
each compliance rule in the set of compliance rules related to the
selected portfolio applies to the proposed transaction; e)
calculating a transaction limit for the proposed transaction for
each applicable compliance rule in the set of compliance rules; f)
sorting each applicable compliance rule from most restrictive to
least restrictive based on the calculated transaction limit; g)
displaying the sorted applicable compliance rules and the
calculated transaction limit for each rule; h) calculating the
buying power of the selected portfolio for the proposed
transaction, wherein the buying power is equal to the transaction
limit for the most restrictive of the applicable compliance rules;
and i) displaying a name of the selected portfolio and its
associated buying power for the proposed transaction involving the
security; and j) displaying a rule description defining how the
transaction limit was calculated; k) wherein each of the above
steps is performed using a computer.
6. A method according to claim 5, wherein the step of determining
whether each compliance rule in the set of compliance rules applies
to the proposed transaction includes testing each compliance rule
against the proposed transaction using a nominal transaction
value.
7. A method according to claim 6, further comprising the step of
determining that the buying power of the selected portfolio for the
proposed transaction is zero if the nominal transaction value
violates a compliance rule related to the selected portfolio.
8. A system for facilitating trade entry and portfolio management,
the system comprising: a) a user interface interacting with a
control program, a data storage device, and a processor; b) a
financial security section of the user interface displaying a name
of a security as well as data associated with the security; c) a
portfolios section of the user interface displaying data retrieved
from the data storage device, the data including a selectable list
of investment portfolios and a buying power limit for the security
associated with each of the investment portfolios; and d) a buying
power module of the user interface displaying a list of compliance
rules retrieved from the data storage device and a transaction
limit calculated by the processor, the transaction limit being
associated with each compliance rule, wherein the compliance rules
and associated transaction limits are listed from lowest
transaction limit to highest transaction limit and are applicable
to a currently selected investment portfolio in the portfolios
section of the user interface; and e) a rule description section of
the user interface displaying how the transaction limit was
calculated.
Description
BACKGROUND OF THE INVENTION
1. Field of the Invention
The subject invention is directed to a system and method for
determining the buying power of an investment portfolio, and more
particularly, to a system and method of determining a purchasing
limit for a proposed transaction involving a financial
instrument.
2. Background of the Related Art
Investment managers, and in particular, those who are responsible
for managing the portfolios of large institutional investors, buy
and sell fixed income securities and equities, based upon the
investment objectives set forth by the investors. For example, a
particular institutional investor may wish to restrict certain
types of assets from its portfolio. In such an instance, the
investor may instruct its portfolio manager not to purchase
corporate bonds or equities from certain corporations or industry
sectors. Alternatively, a particular institutional investor may
have the desire to limit a certain percentage of its assets under
management to certain types of fixed income securities. For
example, an institutional investor may designate that not more than
five percent of its assets under management should be invested in
agency-backed securities.
Investment objectives are generally conveyed from an investor to a
portfolio manager in the form of a set of investment rules or
guidelines. The investment rules are then used by the portfolio
manager to develop compliance rules against which investment
decisions or portfolios of investments are analyzed.
Compliance rules operate in two distinct ways. First, a compliance
rule can affect a particular investment decision, such as the
decision to purchase a large quantity of Treasury notes for
inclusion in a particular portfolio. This decision could be
governed by one or more compliance rules that would influence the
decision before the investment is made. Such a rule is commonly
referred to as a "front end" compliance rule. Alternatively, a
compliance rule could affect the composition of a particular
portfolio, such as by requiring a portfolio manger to sell a
quantity of a particular type of fixed income security. For
example, as a result of a change in interest rates, a compliance
rule may be employed to instruct a portfolio manager to reduce the
quantity of a certain class of Treasury notes within a particular
portfolio. Such a compliance rule would affect the portfolio as a
whole, rather than a particular investment decision, and is
therefore commonly referred to as a "back end" compliance rule.
Compliance rules, whether related to front-end or back-end
compliance, have been used by portfolio managers in computerized
portfolio management systems. In the past, compliance rules set
forth by institutional investors have been translated into computer
readable statements. Such statements are then used to instruct a
computer system to monitor investment decisions and the composition
of portfolios as a whole, and to inform portfolio mangers whether
particular investment decisions or portfolios of investments are in
compliance with the investment objectives of particular investors.
In this case, compliance rules are used to provide portfolio
managers with information concerning purchasing limits for proposed
transactions.
More particularly, prior to executing a trade involving a financial
instrument, a portfolio manager will typically be interested in
knowing the purchasing limit or buying power for a particular
portfolio, or for a group of portfolios. That is, the portfolio
manager would like to know how much of a particular financial
instrument can be purchased for a given investment portfolio,
without violating any compliance rules or limits, before the trade
is executed. Without this information, a portfolio manager could
enter a transaction request for a quantity of securities that may
be in excess of a certain limit placed on the portfolio by the
compliance guidelines. In such an instance, the portfolio manager
would have to modify the transaction request so that it is
acceptable. Without guidance from the system, this could take
several attempts, making the task extremely inefficient. It would
be beneficial therefore to provide a portfolio manager with
transaction limit information, based upon compliance rules, prior
to the execution of a trade to enable the manager to efficiently
allocate available funds among one or more portfolios.
SUMMARY OF THE INVENTION
The subject invention is directed to a new and unique method of
determining the buying power of an investment portfolio. The method
basically includes the steps of providing a set of compliance rules
for an investment portfolio, and applying the set of compliance
rules to a proposed transaction to determine a transaction limit
therefor. The proposed transaction preferably includes a financial
instrument, and more preferably a fixed income security, such as,
for example, Treasury bonds and notes, mortgage-backed securities,
agency backed securities, etc. The compliance rules are generally
based on portfolio guidelines defined by the investor and
regulatory requirements imposed by a governmental entity.
In accordance with a preferred embodiment of the subject invention,
the method includes the steps of providing a set of compliance
rules for an investment portfolio, receiving a request to analyze a
proposed transaction, and calculating a transaction limit for the
proposed transaction based upon the set of compliance rules.
Preferably, the step of calculating a transaction limit includes
calculating a transaction limit for each compliance rule, and the
method further comprises the step of sorting the compliance rules
from most restrictive to least restrictive based upon the
transaction limit calculated for each compliance rule. The method
further includes the step of determining the buying power of the
portfolio based upon the transaction limit associated with the most
restrictive compliance rule. Preferably, the method further
includes the step of determining whether the each compliance rule
applies to the proposed transaction by testing each rule against
the proposed transaction using a nominal transaction value, for
example, one dollar. The invention further includes the step of
determining that the buying power of the portfolio for the proposed
transaction is zero if the nominal transaction value for the
proposed transaction violates a compliance rule.
The subject invention is also directed to a system for determining
the buying power of an investment portfolio. The system includes
means for storing a set of compliance rules for an investment
portfolio, means for receiving a request to analyze a proposed
transaction, and means for calculating a transaction limit for the
proposed transaction based upon the set of compliance rules.
Preferably, the means for calculating a transaction limit is
adapted and configured to calculate a transaction limit for each
compliance rule, and the system further includes means for sorting
the compliance rules from most restrictive to least restrictive
based upon the transaction limit calculated for each compliance
rule. Means are also provided for determining the buying power of
the portfolio based upon the transaction limit associated with the
most restrictive compliance rule. Additionally, the system includes
means for determining whether each compliance rule applies to the
proposed transaction, which means are adapted and configured to
test each compliance rule against the proposed transaction using a
nominal transaction value.
The subject invention is also directed to a method of determining
the buying power of an investment portfolio that includes the steps
of receiving a request to analyze a proposed transaction involving
a security from a portfolio manager for a selected portfolio stored
in a portfolio database, retrieving the selected portfolio from the
portfolio database and accessing a set of compliance rules related
to the selected portfolio from a rules database. The method further
includes the steps of determining whether each compliance rule in
the set of compliance rules related to the selected portfolio
applies to the proposed transaction, calculating a transaction
limit for the proposed transaction for each applicable compliance
rule in the set of compliance rules and sorting each applicable
compliance rule from most restrictive to least restrictive. The
method further includes the step of specifying the buying power of
the selected portfolio for the proposed transaction based on the
transaction limit for the most restrictive of the applicable
compliance rules.
These and other aspects of the system and method of the subject
invention, including the ability to improve the buying power of a
selected portfolio, will become more readily apparent to those
having ordinary skill in the art from the following detailed
description of the invention taken in conjunction with the
drawings.
BRIEF DESCRIPTION OF THE DRAWINGS
So that those having ordinary skill in the art to which the present
invention pertains will more readily understand how to make and use
the method and system of the present invention, embodiments thereof
will be described in detail hereinbelow with reference to the
drawings, wherein:
FIG. 1 is a schematic diagram depicting the core functional
components of the portfolio management system of the subject
invention;
FIG. 2 is an illustration of a graphical display screen configured
in accordance with a preferred embodiment of the subject invention;
and
FIG. 3 is a process flow chart illustrating the iterative steps of
a method configured in accordance with a preferred embodiment of
the subject invention.
DETAILED DESCRIPTION OF PREFERRED EMBODIMENTS
Referring now to the drawings wherein like reference numerals
identify similar elements or aspects of the system and method
disclosed herein, there is illustrated in FIG. 1 a schematic
representation of a computer-based portfolio management system
constructed in accordance with a preferred embodiment of the
present invention and designated generally by reference numeral 10.
Portfolio management system 10 features trade entry and portfolio
management tools and is integrated with compliance and risk
management modules. As described below, system 10 includes software
and hardware arranged in a distributed computing network, including
programs, operating systems, memory storage devices, input/output
devices, data processors, servers with links to data communication
systems, wireless or otherwise, such as those which take the form
of a local or wide area network, and a plurality of data
transceivers within the network.
Referring to FIG. 1, portfolio management system 10 basically
includes a graphical user interface 12 that interacts with a
control program 14 associated with a data storage device or memory
16 and an analytical server 18 that comprises a plurality of
processors 20. The graphical user interface 12 is a data
input/output device that incorporates user-friendly features
presented on a display screen in a framed form having borders,
multiple folders, toolbars with pull-down menus, embedded links to
other screens and various other selectable features associated with
animated graphical representations of depressible buttons. These
features can be selected (i.e., "clicked on") by the user via
connected mouse, keyboard, and voice command or other commonly used
tools for indicating a preference in a computerized graphical
interface. The control program 14 contains an instruction set
written in a conventional computing language such as HTML, C++ or
Java, for coordinating the interactive relationship between
graphical user interface 12, memory 16 and the processors 20 of
analytical server 18.
In accordance with a preferred embodiment of the subject invention,
the memory 16 contains a plurality of cooperative relational
databases, including a portfolio database 22, a rules database 24
and a securities database 26. The portfolio database 22 stores a
plurality of investment portfolios owned by individual or
institutional investors. Each portfolio includes a plurality of
investment products in the form of fixed income securities such as
U.S. Treasury notes or bonds, municipal, corporate or agency bonds,
mortgage backed securities or derivative instruments.
Rules database 24 stores a multiplicity of front-end and back-end
compliance rules related to the portfolios stored in the portfolio
database 22. The compliance rules may relate to, among other
things, duration guidelines indicating a targeted duration for a
portfolio, asset allocation guidelines setting forth eligible types
of investments, credit agent criteria for financial instruments
(e.g., ratings supplied by S&P or Moody's), restricted
securities which may not be added to a portfolio and other
investment practices. Securities database 26 maintains the
identifying and descriptive information about a security,
including, for example, original issuer information, coupon/factor
data, put/call information, cash flow data and payment processing
information.
Referring now to FIG. 2, there is illustrated a detailed
illustration of a display screen of the graphical user interface 12
configured in accordance with a preferred embodiment of the subject
invention and designated generally by reference numeral 100.
Display screen 100 serves as the control panel or "dashboard" for
the trade entry system of portfolio management system 10. The trade
entry system, within which the "buying power" module of the subject
invention is incorporated, is designed to maximize the quantity of
information captured at trade time through the display screen 100
by adjusting for different security types and defaulting the value
of certain data fields to minimize data input by portfolio
managers.
The trade entry system retrieves security information from the
securities database 26 to populate the various field of display
screen 100. For example, the following fields may be automatically
populated with information from securities database 26 upon entry
of the Asset ID or CUSIP in field 102 and transaction type in field
104: security description (name, coupon and maturity date) in field
106; trade date in field 108; settlement date (defaults to
convention based on security type) in field 110; price, yield,
duration and convexity (defaults to previous end of day) in fields
112, 114, 116 and 118, respectively; trading desk and broker in
fields 120 and 122, respectively. It is envisioned that display
screen 100 could be modified to present additional information
stored in the securities database 26, including, for example,
factor, principal, interest, net money, and current par.
With continuing reference to FIG. 2, display screen 100 includes a
portfolios table 124 containing information relating to portfolios
stored in database 22 such as the portfolio name, duration, trade
quantity, trade number, % NAV, buying power limit "BP Limit" and
trade status, as well as commission information. Display screen 100
also provides access to several drop down boxes through a set of
horizontally disposed click tabs spread across the viewing screen.
For example, click tab 130 provides access to trade information,
click tab 132 provides access to comments entered by a user, click
tabs 134 and 136 provide access to information relating to security
and analytics. Click tab 140 provides access to information
concerning the "buying power" of a selected portfolio. In
accordance with the subject invention, the buying power module
enables a portfolio manager to determine a dollar limit or quantity
for a proposed transaction involving a security using the
compliance guidelines stored in the rules database 24 for a
selected portfolio or group of portfolios stored in portfolio
database 22.
The buying power selection tab 140 opens a list box 142 that
displays buying power information including a sorted list of
compliance rules from rules database 24 which affect the buying
power of a selected portfolio and the purchasing limit in dollars
established by the rule. A rule description box 144 is located
adjacent to the buying power message box 142 under buying power tab
140 that provides the detailed character strings that define each
of the applicable compliance rules set forth in message box 142 to
enable the portfolio manager to better understand the basis for the
compliance rule.
Referring now to FIG. 3, there is illustrated a process flow chart
200 depicting the iterative steps employed by the system to
determine the buying power of a selected portfolio or group of
portfolios in accordance with a preferred embodiment of the subject
invention. In describing the process steps of flow chart 200,
reference will be made to the data presented in display screen 100
of FIG. 2. Initially, at step 210, the system receives a request to
analyze a proposed transaction from a portfolio manager involving a
fixed income security for a selected portfolio stored in database
22, often referred to as a "what if" scenario analysis. For
example, as shown in FIG. 2, the portfolio manager enters a
proposed buy request in field 104 for an asset backed security
"ABS" referred to as "SCCMT.sub.--94-2" in field 106 with an Asset
ID designated in field 102 as "85333JBE6" in the amount of
11,192,000, for inclusion in a portfolio called "TGT-C". The
transaction amount is presented in the quantity column of
portfolios table 124. At such a time, the default fields of display
screen 100 are populated with information from securities database
26, including a price of $113.00, a yield of 2.886%, a duration of
2.627 and a convexity of 0.099, as displayed in fields 112, 114,
116 and 118, respectively.
At step 220, the system retrieves the selected portfolio from
portfolio database 22 for use in the buying power
calculation/determination. Then, at step 230, the system accesses
rules database 24 to retrieve the compliance rules associated with
the selected portfolio. As shown in FIG. 2, there are two
compliance rules in message box 142 related to portfolio TGT-C. The
first compliance rule relates to single issuer allocation, and more
particularly, provides that securities from a single issuer must be
less than or equal to 5% of the total value of the portfolio,
unless the security is a Treasury, Agency or Government security.
The second rule relates to sector allocation, and more
particularly, provides that the value of asset backed securities
must be less than or equal to 25% of the total value of the
portfolio.
At step 240, the system determines whether the compliance rules for
the selected portfolio apply to the proposed transaction. More
particularly, the system runs a subroutine 245, which, at step 250,
applies each compliance rule associated with the selected portfolio
to the proposed transaction using a nominal value, e.g., one
dollar. At step 260, the system determines whether the proposed
transaction would violate a compliance violation based on the
nominal transaction value. If there is a compliance violation using
the nominal value, the system will indicate that the buying power
of the selected portfolio for the proposed transaction is zero at
step 270. Alternatively, if each of the compliance rules associated
with the selected portfolio are not violated by the proposed
transaction and thus are applicable thereto, the system advances to
step 280 to calculate the transaction limit for each applicable
rule.
The methodology employed to calculate a transaction limit will vary
depending upon the type of compliance rule. For example, if
appropriate, the system can conduct an iterative hunt and peck
routine, whereby after testing the nominal value against a
compliance rule, the proposed transaction will be applied against
the compliance rule using a value equal to the total available
asset value of the selected portfolio. If that test does not result
in a violation, then there would be no limit for the proposed
transaction. Alternatively, if the total asset value test described
above results in a compliance violation, the system will
incrementally change the test value until the transaction limit is
approached and obtained.
In other instances, where appropriate, the transaction limit can be
calculated based on a percentage of the total asset value of a
portfolio. For example, referring to FIG. 2, the transaction limit
for the single issuer allocation rule is $2,854,607.10. That is,
based on the total asset value of portfolio TGT-C, no more than
$2,854,607.10 of the analyzed asset backed security
SCCMT.sub.--94-2 can be added to the selected portfolio TGT-C.
Similarly, the transaction limit for the sector allocation rule is
$11,192,739.43. Thus, based on the total asset value of portfolio
TGT-C, no more than $11,192,739.43 of the asset backed security
SCCMT.sub.--94-2 can be added to the selected portfolio TGT-C.
After the transaction limits for each applicable compliance rule
are calculated at step 280, the applicable compliance rules are
sorted at step 290 in order from most restrictive to least
restrictive based on transaction limits. Thus, as shown in message
box 142, the single issuer allocation rule is more restrictive than
the sector allocation rule. This is apparent in the fact that the
transaction limit for the single issuer allocation rule is less
than the transaction limit for the sector allocation rule.
Finally, at step 300, the system specifies the buying power for the
selected portfolio based on the transaction limit for the most
restrictive rule. In this case, as shown in the portfolios table
124, the buying power for portfolio TGT-C, with respect to the
proposed transaction involving the asset backed security
SCCMT.sub.--94-2, is $2,854,607.10, which is the transaction limit
for the most restrictive compliance rule shown in message box
142.
Once the portfolio manager determines the buying power for the
portfolio with respect to the proposed transaction, the transaction
may be executed though the trade entry system if that is desired.
However, if the portfolio manager desires to increase the buying
power of the portfolio for the proposed transaction, they can use
the information provided by message box 142 and rules description
box 144 to obtain an in depth understanding of the basis for the
buying power determination. For example, the sector allocation rule
description presented in box 144 indicates that in its current
state, 5.4% of the total asset value of portfolio TGT-C is
represented by asset backed securities, making the transaction
limit 19.6% of the total asset value of the portfolio. Thus, using
the rules descriptions, the portfolio manager can see why the
transaction limit was calculated, which would allow them to
identify alternative opportunities and decide what actions to take,
so as to maximize the quantity of the analyzed security that can be
purchased. The information will enable the portfolio manager to
modify or adjust the composition of the portfolio to increase
buying power for the desired transaction.
For example, in the case of the proposed transaction illustrated in
FIG. 2, if the selected portfolio contained less desirable SCCMT
securities of a different rate and maturity than the more desirable
SCCMT.sub.--94-2 securities targeted by the proposed transaction,
the portfolio manager could sell the less desirable securities to
increase the buying power of the portfolio for the more desirable
securities. Similarly, if the more restrictive rule was a sector
allocation rule, the portfolio manager could sell off less
desirable securities within the restricted sector to make room for
more desirable securities, thereby increasing the buying power of
the portfolio.
Although the system and method of the subject invention have been
described with respect to preferred embodiments, those skilled in
the art will readily appreciate that changes and modifications may
be made thereto without departing from the spirit and scope of the
subject invention as defined by the appended claims.
* * * * *